## [solution]: 20A.1 As we saw earlier, if the switch is made, an extra 100 units per period will be sold at a...

More Details:

20A.1     As we saw earlier, if the switch is made, an extra 100 units per period will be sold at a gross profit of \$175 − 130 5 \$45 each. The total benefit is thus \$45 3 100 5 \$4,500 per period. At 2.0 percent per period forever, the PV is \$4,500y.02 5 \$225,000.     The cost of the switch is equal to this period’s revenue of \$175 3 1,000 units 5 \$175,000 plus the cost of producing the extra 100 units, 100 3 \$130 5 \$13,000. The total cost is thus \$188,000, and the NPV is \$225,000 2 188,000 5 \$37,000. The switch should be made. For the accounts receivable approach, we interpret the \$188,000 cost as the investment in receivables. At 2.0 percent per period, the carrying cost is \$188,000 3 .02 5 \$3,760 per period. The benefit per period we calculated as \$4,500; so the net gain per period is \$4,500 2 3,760 5 \$740. At 2.0 percent per period, the PV of this is \$740y.02 5 \$37,000. Finally, for the one-shot approach, if credit is not granted, the firm will generate (\$175 2 130) 3 1,000 5 \$45,000 this period. If credit is extended, the firm will invest \$130 3 1,100 5 \$143,000 today and receive \$175 3 1,100 5 \$192,500 in one period. The NPV of this second option is \$192,500y1.02 2 143,000 5 \$45,725.49. The firm is \$45,725.49 2 45,000 5 \$725.49 better off today and in each future period because of granting credit. The PV of this stream is \$725.49 1 725.49y.02 5 \$37,000 (allowing for a rounding error).

Solution details:
STATUS
QUALITY
Approved

This question was answered on: Dec 18, 2020

Solution~00031147983773.zip (25.37 KB)

This attachment is locked

We have a ready expert answer for this paper which you can use for in-depth understanding, research editing or paraphrasing. You can buy it or order for a fresh, original and plagiarism-free copy (Deadline assured. Flexible pricing. TurnItIn Report provided)

STATUS

QUALITY

Approved

Dec 18, 2020

EXPERT

Tutor